ESG Criteria Essential to Meeting Fiduciary Duty?
Quantitative analysis of portfolio performance suggests connection to cutting of CO2 emissions
December 21, 2017
Summary
◆ESG (Environmental, Social, and Governance) is an approach to Socially Responsible Investment (SRI). However, there are concerns that the requirements for this area may contradict the primary responsibility of the fiduciary – that is, to prioritize the profits of the principal or beneficiary. The definition which is gradually becoming more widespread is that if SRI investment performance is not subordinated by the approach to investment management, then it can be assumed that fiduciary duty has not been compromised.
◆PRI, The United Nations Environment Programme Finance Initiative (UNEP FI), and the Generation Foundation jointly published a report in April 2017 entitled “Fiduciary Duty in the 21st Century, Japan Roadmap”, which outlines how to respond to ESG issues, while also presenting background information and proposals. According to the 2017 report, Japan is behind in the development of ESG investment compared to other countries, but there is growing interest in ESG issues, especially the question of corporate governance.
◆This report examines the factor of CO2 emissions per unit of sales, and analyzes the relationship to corporate performance, reaching the conclusion that there may be some kind of relationship between level of emissions and corporate performance. We performed a quantitative analysis on this relationship and found that the 5.5-year return on a portfolio consisting of companies with a high rate of decrease in emissions is at 19.5%, just slightly above the return on companies whose emissions decreased overall. In contrast, 5.5-year return on companies with a high rate of increase in emissions is at 13.1%. Returns on companies which experienced a major increase in emissions are conspicuously low.
◆This report is a version of the original report created by our Policy Research Department. In this version, we include only those parts of the Fall Quarterly Survey dealing specifically with Japan: Chapters 4, 5, and 6 (renumbered here as Chapters 1, 2, and 3).
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